When an investor day is planned, even the words: “an opportunity to hear our perspective on the cryptoeconomy and learn about Coinbase’s role in the ecosystem”, has stoked the cryptoverse. The news of the investor day, along with the breaking news on Reuters about the upcoming listing was splashed across the mastheads of all major crypto news sites. Coinbase, valued at $8 billion during the latest funding round will allow an exit for early investors with a direct listing. This will be the first major crypto-currency exchange to go public, a harbinger of things to come.
A direct listing allows the immediate sale of the investors holdings with no cooling off period. Shares issued to insiders may also be sold. Banks who function as underwriters can be dispensed with. Along with the avoidance of the extraordinary effort and investment in time and resources it takes to get to an IPO, including roadshows. Direct listings avoid perception that there are cozy backroom deals being struck with the underwriters and bookrunners when an IPO is oversubscribed, mostly to the detriment of the ordinary investing public.
What a direct listing does not avoid is SEC approval and the amount of oversight and regulation that operates on a public company. This is a heavy bar to clear. Coinbase have to subject themselves to initial and ongoing disclosures of financial, tax and other information. Also expenditures on accounting, legal, compliance and marketing. By all accounts, the current user base of 35 million and the amount of fiat money flowing through Coinbase is enough to sustain all this.
The pressure on the management to perform in the public eye, instead of in mostly adoring crypto-press could bring some challenges. It is often that the team that bootstraps and scales a relatively young and fast growing concern is not ready for managing an adult enterprise. We have many examples of professionals being brought in to manage companies where the founders take a relatively back-seat position, as the enterprises mature and come under more public scrutiny.
Loss Of Control
The other danger is loss of control as boards and governance have to be opened up to a broader and more diverse cohort. There are also sharks in the water, as short sellers would probably pounce on any perceived weakness. The business that Coinbase is in, the crypto-market, is very volatile, any hacks or loss of funds, any technical gaps that are under greater scrutiny.
Some with direct dealings with Coinbase have commented on the ad-hoc nature of Coinbase’s infrastructure. This is often the case with rapid growth and the management of internal systems. Some of Coinbase’s initial investment should have been used to strengthen these systems. A direct public listing without addressing the strength of internal systems will not do much for the continued support of the share price. It also attract critics, when there is a public listing, especially as auditors reports and other SEC filings are open to public scrutiny.
A direct listing is confined to a secondary market at this time. Even though NYSE and NASDAQ have been petitioning the SEC for a primary issuance, selling new shares in a direct listing, SEC has denied their requests so far. According to current rules, no new money can flow into Coinbase, if it lists directly.
The philosophy of direct listing is well suited to a decentralized market. The IPO phenomenon was a back-door way of removing middlemen; but it perpetrated scams and did not protect small investors who were left holding the bag when the music stopped. The SEC should recognize the 8-10% of costs tied up in IPOs associated with bank underwriters, who do bring institutional investors and a support price and heavy marketing, but ignore the little people. The SEC should allow primary listings with adequate protections for retail and institutional investors.
NYSE, BBVA and others are initial investors in Coinbase. They will benefit from a direct public listing. As shown above, a direct public listing is not a bed of roses; there may be many thorns mixed in.